The announcement in December last year that HM Treasury (“HMT”) will, acting on advice, delay the launch of the UK’s answer to the EU Taxonomy did not come as much of a surprise. However unsurprising, the negative consequences of the delay will still be felt both by those in the financial sector who are directly impacted and by businesses across the UK’s economy. In making its decision, HMT would have had to carefully weigh up the consequences of a delay against the risks of pressing ahead prematurely and rolling out a version of the UK Green Taxonomy which failed to send the required “rapid market signal” and secure the confidence of investors and businesses alike.
The UK Green Taxonomy, first teased in HMT’s “Greening Finance: A Roadmap to Sustainable Investing” policy paper in October 2021, is designed to serve as a classification system for corporate reporting and sustainable finance. Its primary goal is to provide clarity in investment decision-making to help ensure consistency (and transparency) when determining whether an economic activity is sustainable. As a parallel objective, it is also intended that the UK Green Taxonomy will operate as a ‘reference point’ for businesses as they set out transition plans and work to align their operations towards net zero and secure financing for these purposes.
The UK Green Taxonomy also underpins the ‘three limbs’ of the UK’s current Green Finance Strategy (“GFS”). Plainly, given its importance, full delivery on the GFS’s objectives can only be realised with an operational taxonomy. As a result, it is possible that the revisions to the GFS which were originally expected last year (now scheduled for “early 2023”) may yet be subject to a further delay as a knock-on effect of the decision to ‘press pause’ on the rollout of the UK Green Taxonomy.
In announcing the delay in a written ministerial statement, Baroness Penn stated that, “…the Government will not make secondary legislation under the Taxonomy Regulations this year…[and] will repeal retained EU law relating to financial services – including the Taxonomy regulations…”.
In response to HMT’s decision to delay, GTAG expressed some disappointment that the original deadline for the UK Green Taxonomy would be missed but welcomed the government heeding its advice and stated that it “remain[ed] committed to providing ongoing independent advice to the UK Government”.
Foreshadowing last week’s announcement, the Chair of the All-Party Parliamentary Group on ESG, Alexander Stafford MP, said during a debate that the “although speed [was] of the essence, we must be sure not to sacrifice quality, and the taxonomy has to be robust”.
A much-loved business maxim states that you can either have “speed or quality”. This isn’t strictly true – both can be achieved but this comes at a premium. Somewhat disappointingly, given HMT’s decision to kick the UK Green Taxonomy into the long (and perhaps not so green) grass, achieving this was deemed to come at too high a price, or perhaps other priorities were simply more pressing.
The optics of HMT’s decision and its negative impact on the UK’s reputation as a leader in sustainable finance cannot be ignored. Reaction to the delay from commentators has been overwhelmingly negative. The European Commission’s recent progress in further refining its own taxonomy inevitably invites further (unflattering) comparisons between the two taxonomies and fuels growing concerns regarding divergence and interoperability.
The risk of divergence is a particular concern for those UK businesses who fall within the portfolios of EU investors or asset managers. Presently, EU owned (or managed) portfolio companies may be required to provide additional climate change and sustainability risks and opportunities disclosures to enable their EU owners to meet reporting requirements within the EU Taxonomy. Divergence between the two taxonomies would require these businesses to direct additional resource to duplicating what is effectively the same exercise but may render different results.
Similarly, large Public Interest Entities ("PIEs") headquartered in the UK, may have chosen to make voluntary disclosures and, in doing so, aligned their approaches to reporting and disclosure to keep pace with the EU. Whilst currently voluntary for non-Member State headquartered PIEs, it will soon become mandatory for those caught by expansion to the scope of the Non-Financial Reporting Directive (the “NFRD”) which has been brought in by the recently adopted Corporate Sustainability Reporting Directive (“CSRD”). Even for those PIEs not caught by the CSRD, voluntary EU-aligned disclosure practices will likely continue. The key reason for this is that it helps to ensure they remain attractive to EU investors and can continue to access capital from EU-based financial institutions. As for portfolio companies, the emergence of a materially different UK Green Taxonomy would burden UK PIEs with double the work and provide investors with very few additional insights.
Stakeholders alarmed by the delay to the UK Green Taxonomy may wish to make their concerns known by responding to the Financial Conduct Authority’s ongoing consultation on Sustainability Disclosure Requirements and Investment Labels before 25 January 2023.
Greening Finance", (ii) "Financing Green"; and (iii) "Captur[ing] the Opportunity"
Namely, (i) "
Interpretation and implementation of the Climate Delegated Act (response to FAQs on the technical screening criteria in the Climate Delegated Act) and Interpretation and implementation of certain aspects of the Article 8 (responses to FAQs on the implementation of the Article 8 Climate Delegated Act for non-financial undertakings).